Overall this version of the neoclassical growth model correctly predicts:

Transcription

1 Overall this version of the neoclassical growth model correctly predicts: 1. Countries that accumulate both physical and human capital at a high rate are relatively rich. 2. Countries that use these inputs productively (that is, have a high level of technology or total factor productivity) are rich. But, the model does not explain why these countries accumulate so much or are so productive. The main overall problem with the model is that it predicts that poor countries will be richer than they are. Another way to look at this is to say that the model over-predicts these countries levels of total factor productivity. 106

2 Differences in Growth Rates and Convergence According to the model, countries at a low level of per capita income (having low levels of both physical and human capita) should tend to accumulate factors quickly and grow at a rapid pace in the short-run. Over time, they will converge to the rich countries: 1. in growth rates (to the common rate of technological progress, g). 2. in levels conditional on all the parameter differences (as we have seen). 107

3

4

5

6

7 Convergence appears to be taking place among the rich countries of the world (OECD countries). But, the poor countries are not catching up to the rich ones. Poor and rich countries may, however, be converging conditionally. That is, they may be converging in growth rates and to very different steady-states. According to the model, a poor country with a low level of k will grow at a lower rate than a rich country with a high k if it is closer to its steady-state: 112

8 The Solow Model Growth equals red minus blue Marginal product and n+d+g Capital per unit of effecitve labour (k/a) Pop. growth, depr., and tech prog. Marginal product 1 Marginal Product 2

9

10 Another way to look at the issue of convergence is to consider the evolution of the world-wide income distribution. By some measures, this suggests convergence; by others it doesn t Overall, the neoclassical growth model appears to do a fairly good job of accounting for differences in both levels of per capita income across countries and different countries growth experiences. 115

11

12 Fig. 3.10

13 Criticisms of the neoclassical theory: Mankiw (1995), with comments by E.S. Phelps and P.M. Romer I. Theoretical Concerns: 1. It does not provide an explanation for the rate of sustained economic growth This is not much of a problem in Mankiw s opinion. 2. The theory cannot account for the magnitude of international differences This can be seen in our analysis of residuals (technology level differences) 118

14 3. The theory cannot account for the slow rate of conditional convergence. The model predicts convergence at twice the rate observed. So, in reality initial conditions are much more important than the theory suggests. 4. Rates of return and the movement of factors If poor countries have low levels of capital (physical or human) then: The rates of return to these factors should be high in poor countries Factors (especially physical capital) should flow to poor countries to take advantage of the high rate of return. 119

15 II. Problems with the empirical work 1. Simultaneity The variables we use to explain the growth rate are not exogenous, but determined jointly with the growth rate. The standard solution use of exogenous instruments, is not easily applied. 2. Multi-collinearity The variables used to explain the growth rate are strongly correlated. Data less informative than may be originally assumed. 3. Degrees-of-Freedom There are too many factors and not enough countries in the data set. 120

16 Edmund Phelps: Criticizes Mankiw s view of human capital Mankiw, Romer, Weil: Human capital proportional to the resources expended to produce it. 1. Early schooling may be more important for growth than higher education. (wage differentials and growth are different things) 2. Human capital is important because it facilitates technological progress and the exploitation of market opportunities. (adjusting to trade liberalization?) Overall, human capital is closely intertwined with entrepreneurship. Phelps stresses the importance of institutions, a topic to which we will return later. 121

17 Paul Romer: Criticizes Mankiw s treatment of technology: Mankiw: public good view of technology. The same technology is available to all countries; poor ones just choose to use production methods that are appropriate for a low level of economic activity. 1. This view generates quantitative problems as we have already seen. 2. It also leaves no role for the idea of technology transfer. This refers to the diffusion of technologies from the countries in which they are developed to the other countries of the world. We will now turn to the study of growth theories that explicitly consider innovation and technology transfer. 122